Welfare Effects of Commodity Taxation

Fritz Helmedag
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Fritz Helmedag: Economics Department, Chemnitz University of Technology, Chemnitz, Germany

Journal of Economic Analysis, 2023, vol. 2, issue 2, 1-13

Abstract: In reality firms most often face negatively sloped demand curves. Then, for a given level of consumers’ surplus, levies on prices yield higher fiscal revenues than specific duties. Therefore, according to the prevailing view, the switch from unit to ad valorem taxation is supposed to generate more welfare; some even speak of an associated Pareto-improvement. However, this is not true because taxing prices merely transfers profits to the Treasury, while total rent remains unaffected. Since excise duties diminish the welfare gain in comparison with untaxed trade, an appropriately designed income tax allows all parties to benefit. Sales should be taxed only exceptionally.

Keywords: Commodity taxation; Unit taxation; Ad valorem taxation (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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